Brexit bounce back for occupier market?

The Newcastle office market made a strong recovery in Q2 2016 following a slow start to the year, with combined take-up for the city centre and out-of-town markets totaling 186,544 sq ft – well ahead of the five-year quarterly average.

At 132,582 sq ft (Q1 2016: 131,102 sq ft), take-up was dominated by activity out-of-town. However, the city centre saw the biggest recovery, with almost double the amount of space transacted in the previous quarter, at 52,977 sq ft (Q1 2016: 18,101 sq ft). This was boosted by Convergys’ 35,000 sq ft letting at The Rocket.

Despite this marked recovery, the impact of Brexit still remains with a number of requirements taking some time to progress, albeit the initial indication is that long-term requirements are still moving forward.

Key occupational transactions, Q2 2016

Property

Size (sq ft)

Landlord / Vendor

Tenant / Purchaser

The Rocket, Stephenson Quarter

35,000

Clouston

Convergys

Cobalt 7B

20,168

Highbridge

Leeds Building Society

Spectrum 3 Seaham

20,000

Hilford Group

Res Q

Source: Lambert Smith Hampton

Grade A supply falls below 100,000 sq ft

Grade A supply in the city centre continues to fall, with the letting of The Rocket bringing the availability to just under 100,000 sq ft. As such, those larger occupiers with as yet unsatisfied requirements have very few available options.

However, law firm Eversheds is due to vacate Central Square South in the autumn, following which the space will be fully refurbished, releasing an additional 50,000 sq ft into the market.

Buildings are still attracting strong interest from student developers keen to make progress before the impending CIL comes into force later in the year, which is impacting on the amount of available secondary space.

Wellbar Central sets new headline rent

A new headline rent of £23.00 per sq ft has been established following the letting of 4,507 sq ft at Wellbar Central to DAC Beechcroft. Although the letting of The Rocket was widely anticipated to set a new headline rent, it is understood that the final figure agreed was below the quoting figure of £23.00 per sq ft.

The combination of secondary office stock levels continuing to be depleted by student developers and increasing occupier demand for the limited available grade A space is likely to fuel further increases in headline rents as we move throughout the second half of the year.

Highest quarterly office transaction volumes since 2007

While investment activity across the UK generally remained subdued in Q2 2016, Newcastle bucked the trend by recording its highest quarterly office transaction volumes since Q1 2007, at £117m. There has however been a slowdown in stock being brought forward as a result of Brexit and, as such, current market appetite is hard to gauge but we would expect yields to remain stable for prime office stock.

The regions are likely to continue to outperform London over the short to medium term, both in terms of investment and development, until we have a better understanding of the capital’s future outside of the EU.